Central Bank of Bahrain

METF 2012: Adapting to Change: Regulatory Priorities to Sustain a Successful Takaful Industry in the Middle East

Manama, Bahrain: 17 October 2012
Opening Keynote Plenary By Abdul Rahman Mohammed Al Baker, Executive Director of Financial Institutions Supervision, Central Bank of Bahrain

Adapting to Change: Regulatory Priorities to Sustain a Successful Takaful Industry in the Middle East

Your Excellencies, Distinguished Guests, Ladies and Gentlemen – Good Morning.

It gives me a great pleasure to welcome you all to the first Middle East Takaful Forum. This event is an opportunity for the Takaful industry to meet and exchange views on current market and economic conditions that have direct bearing on the profitability of the growing Takaful industry. I would like to thank the organizers, sponsors and speakers for supporting this very important gathering.

My theme today is "Adapting to Change - Regulatory Priorities to Sustain a Successful Takaful Industry in the Middle East". This theme is important and timely as the Takaful industry globally, in general, and in the MENA region, in particular, is evolving rapidly and there is a tremendous potential for the regional insurance market to grow and thrive.

As you may be aware, the global Takaful industry has been experiencing double digit growth rate of around 19% with the GCC and South East Asia being the major contributors of the US$9 billion Global gross Takaful premiums. Overall, the GCC market remains at the top in terms of overall contributions, as the latest industry data reveals that it contributes more than 62% of the gross takaful premiums globally.

However, a critical factor that will determine the success in taking the industry to the next level of development is the existence of players with the right quality and caliber, as well as their readiness in terms of capacity and capability to formulate and execute successful strategies in response to new market opportunities. To achieve this, it is essential that key players in the industry remain profitable in the long run. The current market situation makes it even more challenging for Takaful operators to maintain momentum while boosting profitability. This calls for taking proactive steps and rethinking strategies to overcome diverse challenges in order to sustain growth momentum. I hope that the discussions today and tomorrow will seek to address the critical issues that the industry is currently facing and provide fresh perspectives on how to overcome these challenges.

While the Takaful industry has been expanding at a fast pace, the Takaful operators are faced with a number of challenges. First, the regulations of Takaful vary across the jurisdictions and such variances in regulations make it difficult to Takaful operators to function across the regions. This may create challenges for the industry to achieve sufficient scale and critical mass necessary to compete with their conventional counterparts. It is therefore pertinent that the regulatory regimes should be harmonized and standardized, at least on a regional level, on critical issues such as Solvency requirements and key performance indicators, for the industry to prosper and be able to compete effectively.

Second, Takaful operators are subject to the same corporate governance requirements as their conventional counterparts. However, Takaful operators have an additional layer of governance in order to ensure that they operate in accordance with the requirements of Shari'ah. The ultimate responsibility for the Shari'ah compliance of a Takaful Operator lies with the directors and senior management of the Takaful Operator, with the Shari'ah Supervisory Board providing independent opinion on the Shari'ah requirements. It is, therefore, essential that appropriate policies and procedures are established and maintained by the Takaful Operator in order to ensure and facilitate compliance on an ongoing basis.

One of the issues that has been a cause of concern with respect to the profitability of the Takaful industry, is the insufficient availability of Shari'ah compliant financial instruments. Large allocation to high-risk asset classes to maximize returns and ad-hoc approach to portfolio management has also not helped the industry either. There is an urgent need to develop more Shari'ah compliant investment avenues and work on deepening the existing Islamic Financial markets. This could be achieved by allocating the necessary resources to carry out Research and Development on comprehensive strategies to further enhance and widen the Islamic financial markets regionally and globally.

Availability of a qualified talent pool remains a key area of concern for Takaful industry. The industry continues to suffer from a shortage of human resources with requisite expertise. The industry must focus on enhancing retention by developing long-term incentive schemes and training programs.

The regional regulators should encourage the building of talent base and strive to enhance universities and private training centers to offer degrees and certificates in Islamic Finance and Takaful to accommodate the needs of students and professionals and to target a wider range of individuals interested in pursuing insurance studies. This will guarantee the necessary supply of highly qualified talented personnel to meet the growing demands of the market.

As a regulator, the CBB always believes in continual enhancement and improvement of its regulatory infrastructure for the growth and betterment of industry. Currently, we are working on updating and expanding rules on Takaful, in order to facilitate and further enhance the growth of the Takaful industry. Part of the enhancement to the rules relates to the Solvency margin requirements in terms of its calculation and treatment. The CBB has been working closely with the Takaful licensed entities and their respective Shari'ah Boards to ensure that the rules are in line with the best international standards and adequately protect the interest of all stakeholders.

Looking ahead, we see great new and untapped potential for Takaful industry, especially in Family Takaful in the GCC countries which is currently underpenetrated and needs effective distribution channels. Furthermore, we believe that Takaful markets will grow significantly in the coming five years to reach US $20 billion by 2017, with the GCC contributing more than 60% to the global Takaful industry.

Ladies and Gentlemen, this brings me to the end of my remarks. All that remains is for me to wish you an interesting and productive forum, and to thank you all for your kind attention.

Thank you.

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